In theory, management of public funds by Canada’s federal, provincial and territorial governments reflects the preferences Canadians express through their elected representatives. In practice, the revenues and expenses that Canada’s senior governments report after year-end, and the resulting changes in governments’ net worth, are different enough from budget projections to raise questions about accountability for public funds in Canada. These governments routinely miss their targets by meaningful amounts, and the gaps between budgets and results are not random. One consistent pattern is governments’ reporting both expenses and revenues higher than projected in their budgets. Over the 20 fiscal years since 2000/01, Canada’s senior governments overshot their expense targets by a cumulative $119 billion. That means they went into the COVID-19 crisis spending $3,100 more per Canadian than they would have if they had fulfilled their past budget commitments. Even more startling is the cumulative revenue overshoot since 2000/01: $143 billion. Canada’s senior governments went into the crisis raising $3,800 per Canadian more than they would have if they had hit their previous revenue targets. This pattern of revenue overshoots larger than spending overshoots is interesting because it runs against conventional wisdom about the over-optimism of budget forecasts. But the disconnect between projections and results is concerning, and the details of the misses raise important questions about fiscal policy’s behaviour over the economic cycle. If the uncontroversial objectives of stabilizing tax rates, programs and the economy shaped governments’ responses to economic cycles, slumps would cause overshoots of expenses coincident with undershoots of revenue, and booms would cause undershoots of expenses coincident with overshoots of revenue. But that pattern is the exception among Canada’s senior governments. Overshoots on either side of their ledgers tend to coincide, suggesting that governments under-projected revenue and then spent most of the resulting in-year “surprise” or otherwise managed the numbers to achieve a predetermined bottom line. We also note a recent tendency for governments to report negative adjustments “below the line” in their financial reports, signifying deteriorations in their capacity to deliver services not anticipated in budgets. While these adjustments are not, in principle, inconsistent with public sector accounting standards, they are an obstacle to accountability. Ottawa, the provinces and territories would be better placed to handle current fiscal pressures if their recent results had been closer to their budget projections. Appropriate use of devices such as contingency reserves, including proper scrutiny of their use by legislators, can improve accountability to legislatures and voters. Although the fiscal response to the COVID-19 pandemic is currently driving an unprecedented wedge between spending commitments and results, we note some encouraging developments over the 20 fiscal years examined in this report. Both the tendency to miss budget targets and the troubling annual patterns of misses were less pronounced over the past seven fiscal years. The size of below-the-line adjustments also tended to shrink. With COVID-19 having prompted increases in expenses that will persist for years and increases in debt that will persist for decades, two threats loom. One is a greater temptation to manage the bottom line. The other is increased upward pressure on taxes and pressure to cut services. Legislators and voters should demand more reliable budget targets and better adherence to those targets in the future
